Large Interest Rate Cut Coming March 4

Those of you who haven’t understandably tagged my emails for “straight to spam” may have read my observation this past Saturday (see here) that the FOMC’s forward guidance, and the structure of the Committee that gave rise to it, would result in the Committee first staying on the sidelines as markets collapse and then executing a big cut to generate a positive market reaction (and boost confidence).  I had noted the tendency for the market to respond poorly to negative shocks when the Fed says it is on the sidelines back in October (see “The Fed is on the sidelines and it could be bumpy ahead”)
Now that we’ve observed the first part of that dynamic, and with Chair Powell’s comforting statement Friday afternoon that Fed will “act as appropriate,” the question is “what will the Fed’s big cut look like?”  Here’s my call (and by “call” I mean both what I think they will do and what I think they should do).
There will be a coordinated easing across the major central banks and, possibly, the People’s Bank of China and the HKMA. 

The cut will be substantial, at least 50 and possibly 75 basis points.  When the Committee eases policy it judges the effectiveness by the market reaction.  (By contrast, when the Committee tightens policy, it wants to avoid surprises).  The only way to get a positive market reaction is to deliver more than expected.  I’ve copied below a few indicative discussions from past FOMC transcripts.
The easing will include forward guidance designed to build confidence “we are going to do whatever it takes” rather than reduce confidence “the outlook is so grim we expect to keep rates low for a long time” or worse “this cut should be sufficient and it would take a further material change in the outlook for us to do more.”

My view:
Bill Nelson, author of this article is an insider and former Federal Reserve member.
We suspect that the latest reaction by the market has spooked the Fed and other central banks into making an emergency rate cut in an attempt to restore market confidence.
Whether it will occur as soon as Wednesday, we really don’t know.  But we suspect a move soon, as the rate of drop in this overvalued market is terrifying to the powers that be.  Clearly they feel they are losing control of the financial system.
It will be interesting to watch both the reaction of the stock market and gold.  In our view, high volatility will occur for some time, with rip your face off rallies to be followed by quick plunges.
The virus threat is really only beginning, and will show up in waves over the next year or two as the pandemic ebbs and then grows.